In the Singapore International Reinsurance Conference (SIRC) Supplement, Mr. Augusto Hidalgo, President and CEO of Nat Re, discusses the positive performance of the Philippine insurance market and how reinsurers can facilitate the next stage of growth that beckons.

The Philippine insurance market continues to enjoy solid and stable growth above the global average. For much of the last seven years, premiums from non-life insurance grew at the same pace as the country’s nominal GDP; premiums from life, meanwhile, outpaced nominal GDP growth. Insurance penetration has improved as well moving up from 1.2% in 2011 to 1.75% in 2015.

Direct companies from both life and non-life sectors have been churning out steady profits. Before the implementation of new regulations that increased reserving requirement, these insurers’ loss ratios hovered around a favorable 40%-mark. Loss ratios for the country’s professional reinsurer and the government-owned insurance agency have since improved significantly and are now at par with the average of direct insurers.

With a major regulatory change—the Risk-Based Capital Framework, which will be explained later on—and the fast-paced expansion of the Philippine economy, prospects for the industry have never been brighter. If initial market figures for 2017 are any indication of the potential effects of these influencing factors, then it seems that the industry is poised to shift to a higher growth trajectory.

Strong Performance

In the first half of 2017, premium income grew at 11.2% with contributions from the life sector, non-life sector, and mutual benefits associations each expanding at double digits. These are faster than nominal GDP growth and a vast improvement from the almost nil growth in 2016.

Total industry assets, net worth, and paid-up capital have likewise seen sharp increases due to business growth and the increase in minimum capital requirements.

Robust Philippine macroeconomic fundamentals have also bolstered the development of the insurance sector. The Philippine economy is once again the top performer among the ASEAN-5 nations, growing 6.9% in 2016. It is noteworthy that for that same year the insurance industry (in real gross value added to the economy) expanded at a rapid 7.2%, quicker than real GDP growth.

The property and engineering insurance lines of business have made substantial gains as a result of massive spending on public and private infrastructure. In the first half of 2017, the construction industry (in real gross value added to the economy) even bested the performance of the national economy.

Favourable macro environment

Positive effects of our country’s demographic position have spilled over to the life and nonlife sectors. Our burgeoning middle class, a growing labor force of currently 43.7 million, and young population with a median age of 23 have been spending more on insurance—per capita insurance expenditure climbed 79% over the period of 2011-2016 with spending on life insurance alone increasing two-fold.

The stronger purchasing power of our population and favorable interest rates in the Philippines have led to higher spending on big-ticket items such as automobiles and homes which have been a boon for motor and property insurance.

Higher regulatory standards

The recent implementation of the amended Risk-Based Capital Framework (RBC2) will ensure that the industry sustains its strength and stability even as it grows. With the RBC2 in place, insurance companies are required to hold capital that meets the minimum 100% RiskBased Capital Ratio.

This is in addition to the new minimum paid-up capital requirements—as of the beginning of 2017 insurance companies should be holding paid-up capital of at least PHP 550 million (USD 11 million). By end-2022 this will reach PHP 1.3 billion (USD 26 million).

These higher minimum capital requirements and the introduction of RBC2 can spur both supply and demand for insurance. Insurers can now pursue more ambitious growth targets given their bigger capacity. On the other hand, we expect the public to have greater confidence in the industry with the knowledge that insurance companies are better capitalised.

The insurance regulator has promulgated other new frameworks and regulations which may positively impact industry growth. The Insurance Commission has adopted a regulatory framework for microinsurance distribution channels to encourage development of agricultural microinsurance products and distribution of health microinsurance products.

The regulator has also set new valuation standards for policy reserves of life and non-life insurance companies and revised financial reporting guidelines of regulated insurance entities. The Insurance Commission, in collaboration with the Philippines’ actuary society, has also made great strides in working towards an updated mortality table which was last revised in the 1970s.

Market risk

Philippine industry players are well-positioned to benefit from these growth drivers. However, we remain wary of the challenges we continue to face.

Falling rates in the global reinsurance market are still a risk in the local market as it is in most economies. While this is partly remedied by minimum tariffs imposed by Philippine 3 regulators, the problem is aggravated by insurers cutting rates in other lines to remain competitive. If this practice is not properly policed or if the insurance environment continues to be less encouraging we run the risk of creating a race to the bottom among domestic insurers.

The local industry also lags behind its peers in the use of technology. It has not yet harnessed the opportunities of growth arising from digital advancements, such as the Internet of Things and blockchains, due to slow internet speeds and lack of the proper infrastructure for collecting, recording, and sharing data.

It has not maximised either the opportunity in selling its products online because of the lack of regulation in this distribution channel. There are also few incentives from regulators for insurers to design more innovative products to keep up with these disruptions.

Steep taxes on non-life insurance products are a perennial industry issue. The Philippine government imposes total taxes of 27.2% on non-life insurance premium, much higher than Singapore’s 7%, Thailand’s 11.3%, and Vietnam’s 12%. The Philippines’ vulnerability to natural catastrophes is likewise an immediate and persistent threat. The Global Climate Risk Index even ranks our country among the top five countries in the world most vulnerable to fatalities and economic losses brought on by extreme weather events.

Meanwhile, the threat to cyber security is an emerging risk which our country has just recently been more vulnerable to. While the insurance sector has so far been spared from the spate of high-profile incidents hitting our local banks, there is no room for complacency in our industry.

Reinsurance support vital

These key risks and regulatory changes call for a greater involvement of reinsurers in the development of the market. As minimum capital requirements increase and risk-based capital requirements are introduced, Philippine companies can turn to reinsurance as a source of additional capital. National reinsurers most especially can provide not only capital relief but also leverage their resources, particularly their expertise and knowledge of their domestic markets, to help insurers develop new products, manage their catastrophe exposures, and optimise their use of capital.

This profound role of reinsurers is crucial not only in the midst of new regulations and pressing risks, but also against the backdrop of a domestic insurance industry that is set to grow organically with the rising Philippine economy.

Vibrant economic outlook

Our country’s GDP is expected to grow at least 6% in the next two years. This will be buoyed up by the government’s record spending of PHP 8.2 trillion (USD 164 billion) on transportation infrastructure until 2022, a growth opportunity for the non-life insurance industry.

The life insurance industry could benefit further from the demographic sweet spot which, according to research from the Philippine central bank, the country will experience in 2050. Microinsurance is slated to expand its coverage as well, especially with the recently adopted framework for microinsurance distribution.

On the longstanding issue of excessive taxes on non-life insurance premiums, a bill amending the internal revenue code of the Philippines has been recently filed in Congress. The bill seeks to lower total taxes imposed on non-life insurance premiums from 27.2% to around 5%. While the progress on this piece of legislation could be painfully slow it is nevertheless a promising development.

The insurance industry association continues dialogues with government and other stakeholders to push industry advocacy and issues forward. We are reviving talks with the government and international organisations on creating the Philippines’ first-ever catastrophe insurance pool.

We are also negotiating with regulators on lowering the proposed risk-based charges on equities, property, and reinsurance recoverables under RBC2 to keep these rates at par with standards across the ASEAN region.

Growth prospects for the Philippine insurance industry remain bullish but not without headwinds. We are confident however that with stronger partnerships between insurers, reinsurers, and regulators we can more easily manage disruptions, mitigate risks, and reap benefits.